Venture Profile: Darwinex is parsing the algo of great traders

An eon or two ago, trading rooms were noisy boisterous places. Watch the Wolf of Wall Street for flavor.

Today, trading floors have a quieter more cerebral vibe. You might be hard pressed to tell the difference between a floor full of traders and a floor full of programmers.

The world of High Frequency Trading (HFT) captured the public imagination thanks to Flash Boys by Michael Lewis The good news for the humans who are reading this is that machines are fast, but they can also be stupid. The human ability to spot unusual patterns is still valuable.

So while some some developers focus on replacing humans via HFT, others try to parse what the best human traders do and then copy them.

That is where Darwinex (fka TradeSlide) is focused. Darwinex is in the category that I label Low Cost Active Alpha in my Fintech 1,000 database. They are an FCA-approved FX broker and asset manager that offers “copy trading” to its users.

The copy trader idea is simple. If you could have copied George Soros when he “broke the Bank of England” or copied whoever was smart enough to bet that the Swiss National Bank would drop the peg with the Euro, you would make a fortune.

In the equities world, this is what firms like Angel List, Motif and Wikifolio offer. Darwinex is copy trading in the FX space, at least for now.

As I am more familiar with equities trading/investment, I sought an expert in the asset classes that are typically the turf of institutional trading (like, Fixed Income, swaps, OTC derivatives etc) and found Efi Pilarinu co-editor with Frank Fabozzi of “Investing in Emerging Fixed Income Markets” by J. Wiley.

Copying a trade is not as simple as hitting Like/Follow/Retweet. The “social trading” moniker does not fit. Money involves friction for good reasons – there is more at stake than the momentary ping of pleasure of getting or giving a pixelized validation of your social status via  Like/Follow/Retweet. Fintech is about money and money is complex. The challenge in copy trading is how do you separate risk takers with luck on their side, and large ups and downs, from traders that can produce more consistent risk adjusted returns over time.

Darwinex is using a gamified trading challenge called Darwinia, where performance of traders is ranked in a unique manner according to the company. That sounds interesting, so I asked Efi Pilarinu to explain what is really going on here. This is what she told me:

“Darwinex is a 3 year old company that obtained an asset manager license and subsequently, an FX broker license. They are FCA regulated (the UK regulatory body that is considered amongst the strictest).

We can imagine Darwinex as a company with two revolving doors. The north revolving door entrance is for the traders and the south one is for the investors. For now it only has a currency building and there is a special risk management team placed in the heart of the building.

So, lets take a look at the traders as they swirl into the Darwinex buidling. They participate in a gamified trading challenge and get ranked on the basis of 6 attributes (experience, discipline, risk management, performance, scalability, and timing). Those that qualify, have effectively a seat on the asset manager platform of Darwinex. These traders have found a legal way to manage assets (from the users that sign to copytrade through Darwinex) with no marketing efforts, no admin costs, no client relationships.

Darwinex then “repackages” each strategy of these qualified traders into 3 investable products, called Darwins. This stands for Dynamic And Risk Weighted Investment, and it reflects the importance of the risk management service. They create three “VAR risk adjusted” versions of each strategy. Imagine that a strategy is offered in a low 5%VAR, medium10%VAR, and a high 20%VAR version.

Now lets take a look at the southern revolving door. The investors/users, that only recently got their platform up and running on Darwinex, have the investable choices we mentioned above. With a couple hundred traders already qualified, we can imagine that users have already a choice of more than a thousand Darwins. Users can shift from one trader to another and from one risk level to another.

Darwinex has eliminated the free rider problem, by offering delayed transparency to its users. Effectively, as an investor one can see the trading log-journal with a delay.

For users/investors, this is a great time to search for profitable ways to get involved in the Forex market. The USD alone has made many traders capture sizable profits. Each one of us can only be familiar with one or two currency pairs. Most Darwinex traders will typically trade 4-6 pairs and thus, give us exposure to a broader range than we could normally invest in. Currency markets have been offering opportunities lately. Currency markets are sizable. Currency markets trade on fundamentals and on technicals. Flows of major institutional players, Central bank moves, political capital control rules, and much more, make the FX space exciting.

Darwinex is a UK venture based in Level39 with founders originating in Spain (illustrating the London is the Fintech Capital of Europe theme). Darwinex can operate in any European jurisdiction, but not the US and Japan.”

It is wonderful to have an expert like Efi contributing on Daily Fintech.

Robo Advisers have been capturing the media attention recently and also gathering Assets Under Management (AUM) at a blistering fast pace. For some people, the low cost asset allocation model is perfect. You get average returns for little money and little time. For people who want to put in a bit more time to get higher returns these copy trading services are attractive and it is interesting to see the model move across asset classes – first private equity (Angel List), then public equities (Wikifolio and Motif) and now FX (Darwinex).


Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.